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The market cap of the countries comprising 90% of the world’s market cap (end 2010)

A famous finance professor once told us that good diversification meant holding everything in the world. Fine, but in what proportion?

Suppose you could invest in every country in the world. How much would you invest in each? In a market-capitalization weighted index, you’d invest in each country in proportion to the market value of its investments (its “market capitalization”). As seen above, the market-capitalization of the USA is about 30%, which would suggest investing 30% of one’s portfolio in the USA. Similarly, one would put 8% in China, and so on. All this data was pulled from the World Bank, and at the end of this post we’ll show you how we did it.

What makes life easy is that economists have grouped countries into regions and the market caps of each can be computed by summing the market caps of the constituent countries. See this MSCI page for the manner in which we’ve categorized countries in this post:

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The GDP of the countries comprising 90% of the world’s GDP (end 2010)

Because we love you, we’ve also computed how the classic market regions compare to one another in terms of GDP

If you track changes in market cap from month to month as we do, you’ll appreciate the stability that GDP weighting provides. For example, the market cap data in this post, from 2010, is already way out of date.

So, weight by market cap, or weight by GDP, or do what we do and weight by the average of market cap and GDP, but don’t wait to diversify your portfolio outside of a handful of investments you happen to own. Invest in the world.

11 Comments

Jeanja says:

The four ETFs you named from Vanguard all look reasonable, and together they cover equities from all over the world.

But as someone who works in finance, I can’t help but mention that greater diversification would include other asset classes than just equities, such as
– fixed income (bond funds)
– commodities (crude oil, gold)
– agriculture (wheat, soybeans)
However, I would NOT advise trying to get into those asset classes without careful research. Non-equity ETFs are non-trivial to construct, and sometimes they turn out not to track what they claim to track. Plus, if the ETFS are low volume, you may pay a lot in bid/ask spread.

Also, never ever touch leveraged ETFs (which claim to give you N times the return on an index such as the S&P) unless you really know what you’re doing.